Not expecting a return to 9,000 soon
After briefly touching the bear market territory last month, the PSEi suddenly rallied by a total of 11.2 percent the past four weeks, triggered by the stabilization of the US dollar and easing of concerns regarding the economic impact of the US-initiated trade war globally.
Note that the dollar finally stabilized after rallying earlier this year due to the US Fed rate hikes and the outcome of the latest Federal Open Market Committee members’ survey implying that there would be two more rate hikes until the end of the year instead of one.
Meanwhile, the Chinese government recently came out with numerous measures to stimulate its economy to offset the potential repercussions of a trade war with the United States.
Finally, the United States last week reached a deal with the EU to suspend new tariffs and expand European imports of United States goods.
Although the PSEi is performing strongly now, I don’t expect to see a sustainable rally back to the 9,000 level anytime soon due to the following reasons:
Inflation is taking longer than expected to peak
Recall that inflation for the month of June was disappointing as it was higher than economists had expected. Aside from the second-round effects that were evident in the June figure, the prices of oil and rice continue to increase while the peso continues to depreciate, implying that inflation is still a problem.
Second quarter corporate earnings will likely stay weak
Since the Philippines continued to suffer from high inflation from April to June, second quarter corporate earnings results which are currently being disclosed will most likely stay weak and cannot be counted on as a catalyst for share prices to sustain a rally. In fact, the earnings performance of companies that have disclosed their results so far is all disappointing.
US Fed rate hikes to continue
Although the US dollar is currently steady, it could continue to strengthen going forward as the US Fed is expected to raise rates two times more in 2018 and thrice in 2019.
Uncertainty on how the US-initiated trade war would impact global corporate earnings
While there is much debate on how the US initiated trade war would impact economies and corporate earnings globally, only time will tell who the real winners and losers will be. Some companies might also postpone investment plans until conditions stabilize, negatively affecting economic growth in the short term.
That said though, we shouldn’t be too bearish. Although the PSEi is not expected to return to the 9,000 level anytime soon, the rally we are seeing today strengthens my conviction that the PSEi’s recent low of 6,900 was already the bottom. At 6,900, the PSEi’s valuation was very attractive as it was trading at only 15.9X 2018 P/E. Numerous stocks were also trading at valuations that were significantly below their 10-year historical average. Investors should stay vigilant and take advantage of the opportunity assuming that volatility returns and the PSEi once again trades close to the 6,900 level.
The most important lesson that we can learn from the market’s ongoing rally though is that when stocks are cheap, any good news signifying that the worst is over could trigger a sharp recovery. In fact, the recovery can happen so fast that if you don’t own anything, you will be left empty-handed. Therefore, the wise investor should start accumulating stocks when values emerge and simply manage risk by limiting the size of investments and diversifying.
